They [a services startup] have created two internal technology “products” and wanted to figure out how they could turn their services business into a product business that could be financed. This team is talented. They wanted advice. And probably some money.

I gave them advice I don’t think they were expecting from a VC,

“Don’t raise venture capital for this business. Ever. And stop effing around trying to create a product company.”

The post covers a lot of ground, much of which will be of interest to services startups. But some of it applies to big services companies as well

I saw this first hand. My first career was at Andersen Consulting (one of the largest services businesses in the world). We built a hugely successful global services business yet we never got over our product envy from watching our tech clients. So we created internal software projects and all of the internal consultants on those projects became blowhards who thought they knew how to create software product businesses.

We stunk at every product we ever created. We had no sense for gathering real customer requirements. We over-spec’d products. We built for our over-intellectual selves. I can’t think of any great software tools ever created internally by Andersen Consulting. We were a great services business. Period.

Most of the bigger offshore services companies have some kind of active strategy to acquire a stream of non-linear services. Some people expect this to comprise of product-like revenues. In our forthcoming book we argue that tech products are a very different business from services. And given their lack of skills and management experience of the products business, services companies are going to find the going tough.

Fortunately, services companies don’t need to be “rescued” by products. They have ample opportunity to differentiate themselves within the ambit of services itself. The role of retained or developed technology IP doesn’t have to be wrapped up into a product to create value. The beauty of a services business is that there are so many ways in which you can extract value from a client, as long as you have something that they can’t get from the next company.

And yes, some of it, might actually be license or subscription fees. But hopefully, you’re not banking your company’s future on it.

17 Responses to When Does a Services Company Need Products?

Basab, I look forward to read your book; but atleast until then disagree with the viewpoint that service companies cannot metamorphize into successful product companies. Just for thought, isn’t writing a book akin to making a product? From your viewpoint, may I infer that for someone who has been in the business of writing emails and blogs, writing a book is outside the boundary? Obviously not because we all like to change as individuals, companies or communities. So, let the Big IT fail in their quest for new streams of revenue rather than not work at it at all. Good luck!

Writing blogs / emails and writing a Book are no parallels…they are two entirely different workouts emanating from entirely distinct need and breed… Mail / Blog posts are an outcome of a personal need for communication restricted to a closed reader community, entailing short lifespan in terms of its relevance… Authors ideally would like their tomes to be pieces of future reference and expect their theories to outlast their own lifetimes in the least…

Authors ideally would like their tomes to be pieces of future reference and expect their theories to outlast their own lifetimes in the least

That’s a pretty high bar you are setting there Krishna! I think we’ll settle for a significant book about the industry. The manuscript btw is now with Penguin. So the arrow has left the bow, to use a very nice Hindi phrase, that loses a lot of zing in the translation.

My observation is that the services companies don’t focus enough on products and don’t put their best talent to product development, perhaps for right reasons. I think the temptation is the other way as well,i.e.product companies trying to acquire services capabilities. Basab, would you say the product companies will have similar challenges?

I would say that we don’t have enough data points. Successful product companies tend to have services arms that focus purely on implementation support for their own products. Which is not quite the same thing.

But I would imagine that they would face similar challenges in adjusting to a new business model.

So far from what we have witnessed around us, the DNA overlap of a services co. to morph into that of a product co. in the IT space is limited to putting (its tried and tested offerings) into the Cloud or to convert an on-premise app to an on-demand app, tweaking the business model to suit the changeover… The arbitrage on offer is to absorb the Capex of the client to Op-ex of the vendor while delivering on the backend in terms of data security and maintaining the IP of the client to its satisfaction… Beyond that, any adventure would be arguable if not disastrous since no new strains of DNA overlaps have been identified just yet…

The issue is not so much about non-linearity as it is about additional source of revenue. The one word answer is core competence. Service companies are extremely good at certain things, they shd just keep doing that. IMO.

the difference between products and services is blurring particularly in the world of cloud computing. what is Salesforce, Facebook, Netflix (streaming) or Google. They created piece of software / product that they run for you (provide services). Such companies are as good product companies as traditional product companies like Microsoft or Oracle.

Basab – I guess differentiating between consulting / support services (something delivered by human beings) and cloud based services might make sense. the reason “human driven services” companies might need products is to create “higher quality” / sticky revenue stream. Agreed that you can differentiate enough in Services. However, if your business is driven by a resource (human being), that can leave and join competition fairly easily (unlike a piece of code), the business will have significant risks that will manifest in lower multiples (controling for other factors). Brand name, client relationships etc improves profitability and growth but they will not give the pure services business the type of control on revenue that products will give.

BTW, Finacle is a good example of a product coming out of a pure Services company. Agree that such examples are few and far between because it is a different business altogether and requires a different mindset (e.g. much higher risk tolerance, deep pockets for R&D etc) and capability (e.g. ability to attract great engineers, UX designers etc) that services companies dont typically have.

However, if your business is driven by a resource (human being), that can leave and join competition fairly easily (unlike a piece of code), the business will have significant risks that will manifest in lower multiples (controling for other factors)

Only thing that matters to earnings multiples is long term EPS growth. Perceived risk to earnings growth will matter. But every product company carries technology disruption risk that is far greater than that of employees leaving.

Financially, services businesses have been solid. Its a pretty good business from an investor standpoint.

my point of multiples was precisely due to risks. agreed that technology disruption risks will bear on product companies. and that is where the point of controling for all other variables is. take a product company and a services one, include business as usual risks for both (not the disruptive black swan ones as no one can model those) and you will find that the revenues in product is more predictable and sticky. services is a “trench warfare” game. you get bodies and slug it out with the similarly positioned competitors whereas products offer you licensing / subscription revenue and also dedicated services (consulting / support). the challenge is in transforming from one to another (it is equally difficult to go from product to services). one is not better than another but just different, with different DNA and dynamics. both can be solid businesses.

one can argue that Infy and Wipro have high multiples as compared to many product companies. but these are driven by growth not by profitability. controling for growth they would have lower multiples than similarly placed product companies. a better comparison is IBM (services heavy) vs ORCL or SAP (product heavy)

I find the name of the book interesting and apt. Very well thought indeed. I guess no other single word can hold the essence of the largeness, machineness or journey of the big 4/5 players in this space and with a touch of your oriya root!!

Juggernaut is perfect in so many ways (Indian origin being one of them)!! Sad that the publishers have such a low opinion of your potential readers…
Anyway – what are your thoughts on Services coming out of pure Product companies (Think blue!!)?

Since you are writing it, expectations will be high and the bar has to be high enough to fob off reader disappointment… Given the level of exposure the author(s) has had over the IT outsourcing industry both from India and US, from within the industry and outside of it, it’s pretty much achievable… You are in the right position to offer a meaningful perspective on what ails the industry, what can be done and what has to be trimmed (right from SLA to Integration and continuity) so that both vendors and clients get to wield your book like the gospel on outsourcing… and lastly where the guys like Lou Dobbs have gone horribly wrong and why he doesn’t matter anymore…

Basab – Interesting post. I have spent years working for a banking products company and now I am working for a global services company venturing into products. The primary reason why services firms have found it difficult to create and sell products in my experience is the mindset of people in such firms. By and large products companies have a single minded focus on ‘ maximising license revenue ‘ whereas in services firm, a product is perceived as a enabler for ‘maximising services revenue’. But this is fast changing as services firms are catching up & hiring more product specialists to run the products business.